Albert Dunlap was known for turning around badly shaped companies into profitable companies. Through his radical restructuring and downsizing methods, he created shareholder value. At Scott Paper, Dunlap fired 35% of all the employees, and 71% of the corporate staff raising the stock price from $38.00 to $120.00 and sold the company to Kimberly Clark for more than $6B. Due to his past success, Al Dunlap was hired to turn around Sunbeam. Sunbeam had a long period of management and financial instability. In other words, Sunbeam needed a “savior”. Many believed this was Al Dunlap.
Unfortunately, through his tenure at Sunbeam, the stock price fell from a high $53.00 to $16.00 on the day that he was fired. Were his “rightsizing” techniques not adequate? or was he just an overpaid CEO?
- Consider Dunlap’s statement on page 3 of the case: “Stakeholders! Every time I hear the word I ask how much did they pay for their stake? There is only one constituency I am concerned about and that is the shareholders.” Do you agree or disagree with Dunlap’s view of shareholder primacy?” Explain I completely disagree with Dunlap’s statement.
Although shareholders are owners of the company who have “paid” for their stake, stakeholders do play a key role in an organization. In essence, shareholders are stakeholders. According to Kim in Corporate Governance (p. 166) although the primary goal of a firm is to create wealth for the shareholders many believe companies should have a greater responsibility to society – stakeholders. I agree with this perspective. Every decision Dunlap made as a CEO affected not only the shareholders but also affected the needs and interests of the stakeholders in the company.
In the short-term, shareholders profited from the company-wide staff cuts and savings but Dunlap sacrificed Sunbeam’s culture and morale of its employees. In the long-term, the company suffered. During Dunlap’s tenure, many employees were let go without any considerations. Marsha Dunlap, one of Sunbeam’s employee was fired after working for the company for 34 years. Closing down manufacturing plants not only affected the employees but the whole community. Stakeholders, specifically employees are the ones who drive shareholder’s profit through their labor, time, and effort.
Perhaps a more accurate compensation plan would give employees more of an incentive to make the company even more profitable but the employees do bring value to the company. Today, companies like Zappos and Southwest Airlines focus on making their stakeholders, primarily their employees, happy which have resulted in a very profitable business in a very competitive e-commerce and airline industry.
- Describe the first compensation package offered to Dunlap. Was it well designed? What type(s) of behavior would it motivate?
Dunlap is known for turning around badly shaped companies into profitable companies. Due to his past success, Dunlap’s first compensation package was very competitive. His compensation consisted of $507K salary, no bonus, and millions in stock options and awards. Because he believed that CEOs should invest in the company they worked, he also invested $5M in Sunbeam Stock in the first year of his tenure. According to the case, Dunlap made about $1. 5M from his initial purchase of $244.898 shares $12.25 two days before it was announced that he would be the next CEO at Sunbeam.
Most stock-based compensation leads CEOs to focus only on driving the stock price up no matter what is at stake. Given Sunbeam’s past performance and outside pressures from Wall Street and the media, Al Dunlap had no choice to do whatever it took to increase the shareholder value through its stock price. Barron’s published an article accusing Sunbeam of using “creative” accounting to make the company look more profitable through the “bill and hold” program for gas grills and other seasonal products.
Although the case does not directly accuse Al Dunlap to have been part of this, it is still a very questionable issue. By focusing too much on the short-term goal of driving the bottom line up, Dunlap did not address Sunbeam’s long term goal of the company and/or strategies and most importantly, Sunbeam’s culture and employee’s needs were completely dismissed.
- Was the second compensation package offered to Dunlap well-structured? Was it excessive? Was it necessary? Dunlap’s philosophy was that compensation should be tied to performance.
His goals for the company were to bring the stock up, lay off 12,000, reduce the workforce in half, and product lines by 87%, consolidate the administration and sell off several divisions and double sales over the next three years. His second package was distributed too soon as he had not completed these goals. As soon as Sunbeam acquired new companies, he was given a second compensation package. He received a bonus- a three-year contract extension that doubled his salary from $1M to $2M a year and a grant of 300K Sunbeam shares.
Again, his compensation package was stock/options based which would lead to Dunlap to do whatever it takes to drive the stock price up. Given the fact that his first compensation package was already stock-based, this new package was excessive and not structured accurately. The second package should have been offered at least a year after the acquisitions were done, that way Sunbeam’s board of directors would be able to measure whether acquiring these three companies was a sound and profitable decision. Also, no more shares should have been issued until a year after the acquisitions were made. Did the board make the right decision in firing Dunlap? Is this an example of effective or poor corporate governance? The board made the right decision to fire Dunlap. Dunlap had almost two years to turn the company around and bring overall value to the company. Although he focused on bringing in shareholder value, overall he did not meet his goals as he focused too much on short-term strategies. One of his goals as explained earlier was to increase the stock price and double sales in the next three years. In addition, the stock price was lingering at $25. 0 in an upmarket and the outside pressures from Wall Street as well as the media speculations that Sunbeam was using questionable accounting tactics to inflate their sales did not help. The board scheduled a meeting with Al Dunlap immediately after these rumors were spread/written in the media, instead of dismissing them. When the board asked Al Dunlap directly whether or not sales will increase as expected, he was very hesitant in answering this question and gave the board an excuse about Sunbeam needing more time to see the overall turnaround results.
Most shocking was how Dunlap reacted to the questions by stating that if the board does not give him and the CFO support that they were ready to leave and just wanted to get paid. One of the reasons I believe that this was indeed an example of effective corporate governance is the fact that the board performed its due diligence in figuring out the truth through research and talking to others in the company about Sunbeam’s financial situation. Board discovered that Al Dunlap and the CFO had underestimated the true financial situation of Sunbeam.
Although Al Dunlap was not directly accused by the board of the “bill and hold” questionable accounting methods, the board fired him primarily because they had lost “trust” in Al Dunlap. Al Dunlap was not honest about the true financial state Sunbeam was in, which made it seem like he was hiding this from the board of Directors. Al Dunlap’s lessons he advocated through his own book – “Mean Business” were definitely not in zinc with his actions at Sunbeam.
Another reason this was an example of effective corporate governance was the board’s decision to fire Dunlap regardless of their relationship with Dunlap. Charles Elson, one of the board members was a close friend and personally recruited by Al Dunpal to be a board member was the one who did the firing. At the end of the day, the board of directors did what they needed to do to make a decision that would positively affect the shareholder’s value as well as the stakeholders of the company.
